Saturday, January 28, 2012

Bretton Woods super-nova reprise

My central thesis is the current debt super-cycle will end in a race to inflate and cause currency depreciation by all the world’s central banks that foolishly adopted the Western fractional reserve monetary system with the U.S. greenback as its reserve currency, that was at first pegged to gold up till Richard Nixon’s abandonment of the gold peg in 1971.

What a conservative, Nixon.  Wage and price controls, abandonment of any shred of monetary discipline for the entire world.. but he went to China…. What a dude!

Just as virtually every American must go up a learning curve with credit cards—many marriages have a “credit card moment” where the cards get cut up and a new fiscal regime begins—so the entire world has traveled down the borrow-and-spend-because-we’re-worth-it path that has led to the current mountain of debt on the shoulders of the global Sisyphus, as the world tries to push the boulder back up to the mountaintop.

The world is now on the steepest upward slope of the credit learning curve.

But central banks are not like people.  Central banks print money.  Too much money chasing too few goods equals inflation.  Inflation equals reduced purchasing power, and hence reduced real debt burdens.  This is all undisputed by all brands of economists.  The disagreement is whether the central banks, who have stated publicly that a little more inflation would definitely be a good thing, can get an inflation going in a liquidity trap, where, because everyone already has too much debt, they don’t want any more.

Ah, but even as all fractional reserve fiat money is technically credit debt, it is also a medium of exchange used for transactions for goods and services, including labor.

If an inflation is a sustained rise in the general price level, a working definition that should be acceptable here, then it is a labor market phenomenon as well as a monetary phenomenon.  I’ve gone so far as to say that “Inflation is always and everywhere a labor market phenomenon—a wage-price spiral—accommodated by monetary policy.”

So to get an inflation going in an admittedly quite deflationary environment (deflation is what happens when asset values supported only by bad debts on the liability side of the social balance sheet collapse as the badness of the liabilities is recognized, however slowly) you need to have some prices rise, perhaps because of a supply shock, and then to have businesses accommodate the however feeble demands for increased compensation to maintain real wages, a move that businesses would make only out of a renascent sense of social responsibility to labor and out of the record share of GDP they have garnered to capital in recent years. 

Then it is simply a matter of supply costs maybe going up a little more, maybe as the result of a different supply shock from a different sector—say the first was oil, as a war gets going in the Middle East, and the second is due to crop failures around the world because of a summer drought—and rather than send their economies into depression, the central bankers will accommodate as necessary, although with the level of excess reserves available in the banking system it may not take much accommodation in the initial phases of the new inflation.

And so a wage-price spiral is born that can support a sustained rise in the price level that can reduce the real value of outstanding debts.

The nation that gets the inflation going first wins in the super-nova of Bretton Woods.  Everybody’s got too much debt (in the Western world) and the first nation to depreciate its currency and the value of its debt picks up exports while paying down debt.  They reach the top of the mountain first.

And as I pointed out recently, the quickest way to get an inflation going—and I would maintain this applies even in a deflationary environment—is via the supply shortages and rationing that accompany a big hot war.

Hence I believe Daddy Warbucks and his military-industrial complex friends are pushing the United States toward war as quickly as possible.

But what will happen when the entire Western world rushes to follow, as I don’t believe the Europeans will be able to avoid the temptation in the event?

Collapse of the world financial system is a distinct possibility.  A galloping inflation or hyperinflation across the Western world would make international transactions highly uncertain.  Barter arrangements might be made for big ticket items like energy (already happening between Iran and China).

In the U.S. inflation and a return to positive real interest rates would at least kill the carry trades that have enriched the financial elite for a decade or more, would pull many homeowners into positive equity, and would most benefit those who locked in to super low rate financing as they leverage the funds into commodities.

When this will happen is anyone’s guess.  There are credible predictions by Charles Nenner, John Robb and others that a major war will begin this year or next.

China will implode into authoritarianism as their bifurcated economy tanks.  There will be no war with China this time, except for a possible skirmish or two in the Caucasus.  

The neocons, including Obama, who faces reelection, for which a war is always a useful ruse, will argue that we need to occupy the Middle East to assure supplies of “our” oil.  Israel will encourage the U.S. to decimate the populations of several Middle Eastern countries that it considers a threat to its survival.

All across America, Americans are transfixed by a Republican primary race that rivals the tackiest daytime soap opera for lurid content and lowbrow appeal.  Keep that TV on so you don’t have to think!

All the talk about taking America back will be put on hold for a moment as Chaos rears its ugly head and the last vestige of normality in the economy vanishes.

But then, as the world enters a period of Total Uncertainty, there will be an opportunity for revolutionary change.  For an amendment to the Constitution to declare that corporations are not people.  For progressive taxation that recognizes that the people sitting at the top of our corporations are not doing all the work, and that returns after-tax income distributions to levels found in healthy societies (cf. Wilkinson).

Because if we’ve learned anything in the years since Hank Paulson announced that if he didn’t get his way, a depression would start on Monday and martial law would need to be declared—if we’ve learned anything, it’s that the false god of Econ has lied to us lo these three or four decades.  Lied abjectly.  And the psychologists and epidemiologists, whose best work is ignored by behavioral economist whores running investment management businesses, have shown us that happiness and human welfare do not increase with GDP in any meaningful way, that more income above a level that satisfies some basic human wants and needs does not make us better off, but that what makes us happy and vibrant and alive and long-lived and healthy is living in an interconnected, more-equal-than-now human community, with a sense of interconnectedness and a lack of the chronic status insults, social stratification and isolation and personal degradation that accompany life in latter day banana republics like the United States.

The last world war produced the most pronounced leveling of the American income distribution in recorded history (cf. Income, inequality, debt, crisis and depressions).  There is a secret hope within the Beltway, methinks, that we can pull off the same trick again with the right conflict, started by the right false flag incident.

But the public is smarter than it has ever been.  IQ scores have been rising.  Information is instantly available around the world.  It’s hard to create a bogey man today.  The people know all the Hollywood tricks.  And they’re sick of war.

It’s no accident that folks in the U.S. military services overwhelmingly support Ron Paul.

So the next time the world enters a historical moment of Total Uncertainty, let’s be ready to use it to get what the 99 percent want, starting with a Constitutional amendment that corporations are not people, and from there on to a clean up of the laws that should govern this land, that the 1 percent who currently live above them may rejoin the human fold.

The readiness is all.



  1. Great post, fantastic. Keep up the good work.

    john e

  2. Amen. We are ready. Come the revolution.